Investment Highlights

• We maintain BUY on Yinson Holdings (Yinson) with a higher SOP-based fair value (FV) of RM4.00/share (from RM3.96), which also incorporates a premium of 3% for our unchanged ESG rating of 4-star (Exhibit 6). Yinson is the first oil & gas service provider to proactively invest in renewable energy assets (Exhibit 6). Our fair value implies a FY25F PE of 13x, which is 1 SD below the 5-year average of 18x.

• The slightly higher FV is mainly attributable to a higher operations and maintenance escalation rate assumption for floating production storage and offloading vessels (FPSO) John Agyekum Kufour, FPSO Helang and FPSO AbigailJoseph by 4%-6%, given our expectation of a higher operating cost environment within the vessel charter space moving forward.

• We raise FY24F-26F earnings by 7%-11% to account for higher revenue fueled by strong progress recognition of ongoing EPCIC contracts. The contracts are mainly in respect of floating production storage and offloading vessels (FPSO) Maria Quitéria, FPSO Atlanta and FPSO Agogo.

• After stripping out RM30mil of unrealised forex gains and impairment loss on the Nokh Solar Park, Yinson’s 9MFY24 core net profit (CNP) of RM716mil exceeded our expectations. This was due to stronger-than-expected progress billings. The results accounted for 83% of our FY24F net profit and 102% of street’s (Exhibit 1).

• YoY, 9MFY24 revenue more than doubled to RM8.9bil on: (i) stronger progress for EPCIC contracts i.e., FPSO Maria Quitéria, FPSO Atlanta and FPSO Agogo, and (ii) contribution of FPSO Anna Nery’s charter income, which began operations in May 2023. However, CNP rose by a smaller 82.7% dragged by a lower EBITDA margin, which fell to 23% from 30% in 9MFY23 and higher finance costs and tax expenses.

• Sequentially, 3QFY24 CNP rose by 26.3% to RM283mil despite weaker revenue of RM2.8bil, which fell by 9.6% due to slower progress for FPSO Maria Quitéria and FPSO Atlanta. The stronger bottom-line performance can be attributed to lower tax expense resulting from higher foreign tax credits for FPSO Agogo.

• Progress for the group’s EPCIC projects is on track. Cumulative percentage of completion as of 3QFY24 are as follows: FPSO Atlanta (50%-75%), FPSO Maria Quitéria (75%-100%) and FPSO Agogo (25%-50%).

• We expect revenue to moderate in the coming quarters as the EPCIC contracts for FPSO Atlanta and FPSO Maria Quitéria reach their tail-end. Nevertheless, we believe that Yinson’s outstanding order book of RM99bil (US$22.4bil) as of November 2023 would provide visibility and support earnings until 2048F.

• Management is upbeat on the outlook for the FPSO industry as there are supply constraints while at the same time, demand is expected to be positive underpinned by new offshore production projects, particularly from Brazil and West Africa. The new developments are envisaged to compensate for declines in natural fields. Energy Maritime Associates estimates that as many as 12 FPSO contracts could be awarded in FY25F.

• We also gather that global FPSO lease contractors are turning more selective due to systemic risks. These include single customer exposure and capacity constraints. Yinson is currently focused on delivering its 3 FPSOs in this order: FPSO Maria Quitéria, FPSO Atlanta and FPSO Agogo. Yinson will only consider pursuing new jobs upon availability of spare capacity.

• Additionally, Yinson is looking to extend the purchase option for FPSO Nganhurra with owners Woodside Energy and Mitsui E&P Australia. The contract will lapse in December 2023. However, this is subject to a new client, who can bear the cost of extension on behalf of the group. Recall that the option to purchase the vessel is in relation to the exclusivity agreement that the group had entered in November 2022 with British Petroleum (BP). This is to supply a FPSO for the proposed 10-well subsea Palas, Astrea and Juno Oil Fields (PAJ) project, which is based in Block 31 offshore Angola. Since then, however, no progress has been made.

• The stock currently trades at a compelling FY25F PE of 7x vs. its 5-year average of 19x. We believe that the discount in unjustified as Yinson is a globally recognised FPSO player with a healthy balance sheet and bright prospects.

Source: AmInvest Research - 15 Dec 2023